Industry facing tough year

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Manufacturers are facing a tough year after being hit by soaring
prices for raw materials, January 1 tariff cuts, the high dollar
and fierce competition from China.

Although domestic demand remains solid, a convergence of factors
suggest that 2005 will be another difficult year for the embattled
sector.

Australia's terms of trade - the ratio of export to import
prices - is at the best level for three decades thanks to a
commodities boom.

That is good news for mining companies and farmers. It is,
however, making life tough for local firms being squeezed by
soaring production costs.

Australian Industry Group executive director Heather Ridout said
the cost of basic inputs had risen by 50 to 100 per cent over the
year, with prices for steel and energy particularly high.

"Input costs are huge," Ms Ridout said. "Our fortunes are still
pretty dependent on the strength of domestic demand, and you'd have
to say that's holding up reasonably well, but the outlook certainly
points to some softening."

The Australian dollar, which has leapt by 30 per cent against
the US dollar over the past two years, has compounded the sector's
problems by making Australian products less competitive
globally.

Holden spokeswoman Emily Perry said production was running
strongly, but the car market remained fiercely competitive, with
the dollar up against the currencies of Korea and Japan.

"Yes, we are selling a lot of cars, but it is a tough market,"
Mr Perry said.

Competition for local car makers got even tougher on January 1
when the tariff on imported cars was cut from 15 to 10 per cent. In
theory, that cut the price of a $50,000 vehicle by about $2500,
although most of that has probably already been passed on to
consumers through lower prices or added extras.

Tariffs on textiles, clothing and footwear were also cut.

CommSec chief economist Craig James, predicting an even higher
dollar, said many local firms would be forced to make tough
decisions over the coming year.

"The fact that Chinese businesses are continuing to churn out
quality goods at cheap prices means that manufacturers have got to
make harsh decisions about whether they continue to produce here or
whether there are benefits of relocating their production
facilities in China or other parts of Asia," Mr James said.

"That's a decision that many manufacturers have already gone
through and one that quite a lot will face over 2005."

Australia has been losing its share of global exports for
manufactures for years now. Over the five years to 1997, Australia
accounted for about 0.4 per cent of global manufacturing exports,
compared with about 0.3 per cent for the five years to 2003.

Mr James said it was a common story, with most developed nations
losing trade to Asia.

"China will continue to push down prices for manufactured goods
and that poses significant challenges," he said.